Personal loan: What are the key differences between secured and unsecured loans? Details here | Mint

Whenever you fall short of funds, you are recommended to raise a loan from a bank or a financial institution. A loan is typically divided into two broad categories i.e., secured and unsecured. A secured loan is given against a collateral i.e., an asset, whereas an unsecured loan is given without the security of any asset.

This is the key difference between the two types of loans. Another difference that keeps the two loans distinct is that a secured loan is given for such loans as home and car, while unsecured loan is personal loan that is given to meet a range of personal needs.

However, one should decide between the type of loan on the basis of purpose for which the money is being borrowed. For instance, when you need a loan to go on a vacation, then one would not want to raise a secured loan, and opt for a personal loan instead. 

On the other hand, when you want to raise money to buy a car, then you would have to opt for a secured loan. Let us dig deeper and peel off some of the layers of two types of loans.

Key differences between two types of loans:

1. Interest rate: A secured loan has a lower rate of interest while an unsecured loan has a higher rate of interest.

2. Collateral against the loan: A secured loan, by definition, needs a security to support while unsecured loan does not need a security to procure it.

3. Purpose of loan: A secured loan typically is given for a specific purpose such as to buy a car, house and these assets are secured by the bank before loan is disbursed to the applicant. 

On the other hand, unsecured loans, in the form of personal loans, are not given for any specific purpose. It could be to meet any of the personal needs such as to organise a wedding, to buy a luxury item or to go on a vacation, among other things.

4. Amount of loan: Usually the secured loan’s amount is dependent on the value of the asset which is held as a security. Conversely, the amount of unsecured loan is generally dependent on the earning potential of the applicant.

5. Documents: The documents required to raise a loan include PAN card, aadhaar, identity document and salary slips. To raise a secured loan, along with these documents you need the ownership document of the asset which will be held as a collateral. 

To sum up, if you want to raise money to meet a financial need, you can raise a loan which could be secured or unsecured. If you have an asset to give as collateral for a specific loan, then you could opt for a secured loan. On the other hand, when you need money to meet a slew of personal requirements — you could raise an unsecured loan.